Averages
and
indexes
both report price movements of a certain set of investments. What
the differences are between the two and how the variations influence
the information these resources provide aren't always obvious.
That’s true in part because some measurements that are called
averages are essentially indexes, and some indexes are really
averages.
What’s an average?
A simple
average
is an arithmetic mean. The prices of the securities in the average
are added together and divided by the number of securities represented.
For example, to calculate an average of ten stocks, you would
add their prices and divide the total by ten.
But in a world of
mergers
and
stock
splits,
as well as a changing roster of stocks, a
simple average is not a reliable indicator of true market movement
over time. To compensate, the DJIA, for example, divides its price
total not by 30, but by a much smaller number that has been constantly
adjusted over the years to take these variations into account.
